Economic Insights - April 2 - 6, 2018

Predictable payroll payback

Friday’s payroll report from the Bureau of Labor Statistics was disappointing. Headline job gains were a measly 103,000; revisions to January and February payrolls lopped off another 50,000 jobs. For several reasons, we’re not worried. These reports are volatile, subject to sizeable revisions, and have a wide statistical confidence interval. The revisions were essentially all within the education sector, so not such a negative for growth. Further, averaged with the spectacular job growth in February that was revised up to 326,000, the two-month average of over 200,000 new jobs is on trend. Besides, considering paltry population growth, monthly payroll gains under 100,000 would be enough to keep the unemployment rate steady. Overall payroll growth is still solid.

We wish the labor force participation rate had ticked up a tenth, rather than down the same. Still, substantial numbers of job openings and rising wages have pulled enough people back into the labor force to offset the large swath of Baby Boomer retirees. In February, the labor force grew more than the losses from retirees, an extremely healthy trend. The participation rate of prime-age workers (25-64 years) is up sharply to 82.1% from a low of about 80.6%, another big positive. And the smoothed year-over-year gain in average hourly earnings at 2.7%, the best pace since mid-2009, kept the gradual uptrend firmly in place.

Weather?

Job gains may have been held down a bit by storms on the East Coast during the survey week. Construction and retail jobs are categories most likely to be affected by weather. Job growth in each was far below the vigorous bounce of February, up 65,000 versus down 15,000 in March, and up 47,000 versus down 4.000, respectively. That 131,000-swing explained most of March’s downside surprise.

Inconsistent:

The meager payroll growth is not worrisome since it is totally incompatible with other labor force and consumer data. ADP’s estimated job growth has been near a 200,000 pace for months. New claims for jobless compensation stay the lowest in decades, and at record lows as a portion of total employment. Bloomberg’s consumer confidence measure is the best since 2001. March light vehicle sales were at a sturdy 17.4 million annual rate, up 2.5% from February. U.S. households show great confidence in the job market: the net portion of people saying jobs are “plentiful” versus “hard to get” is very high. In addition, the job leavers rate jumped to 13.1% from 11.6%, and is the highest since March 2001. When workers quit their jobs, they surely have real confidence in finding a better job or higher pay.

Impact the Fed?

Not likely. Federal Reserve (Fed) Chair Powell was quite confident about economic prospects at his press conference last month; the payroll report in its entirety did nothing to invalidate that conviction. But, the report was also not so robust to suggest the Fed should get more aggressive. If anything, though, the report should disabuse investors of the fear of four rate hikes in 2018 rather than three. “Gradual” means gradual; four hikes are not needed.

Decoupling synchronized growth

Surveys of business purchasing managers (PMIs) fell in Japan and the Eurozone and were mixed in China. This validates, at least for now, ideas that 2018 would be a year of modest economic deceleration. The March Eurozone composite PMI slipped over three points from its January peak to 55.2, the lowest in 14 months. That’s still a healthy reading, but suggests any upside to our 2% to 2.5% forecast for 2018 has vanished. Joblessness continues to fall rapidly, now at an 8.5% rate in February, a full point below last year. Even so, retail sales are sluggish after a stellar fourth quarter; wages are rising but hesitantly.

PMIs in Japan are similarly weak with industrial production likely to have contracted in the first quarter. Business sentiment stays high; it should be, given excellent profit growth. The labor market is incredibly tight with the unemployment rate a miniscule 2.4%, and labor shortages perhaps on the horizon. The participation rate of women is surging, one real bright spot for the economy.

Commodity prices also imply that overall global growth momentum has softened. Oil prices, both Brent and West Texas Intermediate, double-topped in January and March and are moving lower. Copper is nearly 10% off its late 2017 high. Several broad price indices are edging lower.

U.S. momentum strong:

No weakness in the United States. Economic energy is still rising; a growing number of good jobs is surely part of the reason. Despite weak payrolls, the labor market is in great shape and still upgrading. Manufacturing jobs are surging, up another 22,000 in March and up by 232,000 over the last year, the best 12 -month showing since May 1998. The broader category of goods-producing jobs is also expanding mightily. The 513,000 four-month average gain of new goods-producing workers is the best since the last half of 2014, and better than any other such period in almost 20 years.

Maybe the recent weakness in low-paying leisure and hospitality jobs (fewest 12-month new job total in six years) is because better jobs are opening in the goods sector. Maybe that’s why discouraged workers are returning to the workforce. It may also be why the participation rate of prime-age workers is rising nicely. This suggests that, as labor market slack dwindles, wage growth should accelerate to 3% or more. That will support healthy consumer spending. It should also keep economic growth on track for the 3% to 3.5% pace we expect, and payroll gains near a monthly 200,000 range this year.

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